For Connecticut lawmakers struggling to cope with the state’s mounting deficit, there is one skyrocketing expense they won’t be touching: state labor, health and retirement costs.
Carved in legislative stone until 2017 is a 20-year pension and benefits deal that gives state workers low-cost health care benefits and generous pension payouts.
Added to the pricey mix is a negotiation process called “Last Best Offer Binding Arbitration” that empowers an arbitrator to choose either the state’s wage proposal or the union’s — no compromises. Binding arbitration kicks in when state and union leaders can’t agree.
Current and former state officials say the 20-year pension and benefits deal and the binding arbitration law have state officials over a financial barrel, giving them little discretion when it comes to reducing labor costs.
That is a challenge for lawmakers trying to impose fiscal discipline on the state’s $17.8 billion budget for FY 2008. This year’s deficit is projected to reach $68 million. Next year’s could double.
“These restrictions make the problem of balancing the state budget in a time of declining revenues a very difficult proposition,” said Jeffrey R. Beckham, undersecretary for legislative affairs for the state Office of Policy and Management, or OPM.
Peter Gioia, an economist with the Connecticut Business & Industry Association, agrees. “It was an unfortunate major error that health care and pension agreements were negotiated for that long of a period,” he said. “No one in the private sector would have locked themselves into that kind of agreement. Each year, we see a wider and wider discrepancy in benefits between the state and private sector.”
Stable Government
But union leaders maintain that the 20-year health care benefits and pension agreement helps stabilize state government, said Michael J. O’Brien, a state supervisor with the Department of Environmental Protection and president of the Connecticut State Employees Association.
The agreement ensures ongoing public service and reduces worker turnover, O’Brien added.
The agreement accomplished what it intended, said Robert D. Rinker, the union’s executive director. It helped the state achieve some savings, promoted labor peace during a tumultuous period in state and labor relations, and promised state workers a predictable, long-term benefits structure, he said.
“Otherwise, every time there is a fiscal crisis, the state holds that gun to workers’ heads and threatens to shoot it,” Rinker said.
The agreement promises state workers low-cost health care benefits with co-pays of $10 or $15 for office visits and $3 or $6 for prescriptions. Medical plans can cost workers between $45 and $204 in bi-weekly deductions for family coverage.
Notably, lawmakers who approved the benefits deal in 1997 had a personal financial interest in seeing it win approval in the General Assembly. Although they are only part-time workers, they are eligible for the same health care and pension benefits.
It’s coverage that everyone should have, Rinker said. He maintains that the state has actually lowered its health care costs by keeping state workers healthy and by reducing incidents of costly acute medical problems. He also said the union reduced state health care costs for the coming year. Projected to increase by 8 percent, negotiations resulted in lowering the premiums to 2 percent less than it costs this year, a cumulative 10 percent savings, Rinker explained.
But Gioia isn’t impressed. “Are they on drugs? They have the most expensive plan in the state. They have far richer benefits than anyone in the private sector.”
The average health insurance cost for an individual employee is $12,200, of which the state pays $10,800 per year. For family coverage, the average cost per active employee is $17,200, and the state picks up $14,900.
By comparison, the cost for an indvidual in the private sector is $4,590 and for family coverage it is $12,884, according to the 2007 Kaiser/HRET survey.
Pay Later
The state will need to appropriate in the next fiscal year about $4 billion for wages, health care and pension contributions for the state’s 56,617 workers and health care for 39,797 retirees. That’s about 25 percent of the state’s nearly $18 billion budget, according to the state comptroller’s office.
State officials are not required by law to fully reserve for retirement obligations in the state’s operating budget — so they haven’t.
As of FY 2006, the state’s unfunded retirement obligations included:
• $21.7 billion for post- retirement health and life benefits
• $7.9 billion for state employee pensions
• $6.9 billion for teachers’ pensions
• $2.2 billion for teachers’ post-retirement health and life benefits.
When the state’s $14.4 billion bonded debt is added to what Connecticut owes on its unfunded retirement system obligations, the total long-term obligations exceeded $54 billion last year, up from $49 billion the year before, OPM estimates.
OPM predicts that if the state doesn’t address its retirement liability, Connecticut’s retirement costs will skyrocket. In its fiscal accountability report, OPM calculated that between 2003 and 2012, state retirement costs will soar 127 percent.
Union leaders say it’s not their fault. They blame the state’s mishandling of its obligations to retirees, taking the pay-later approach that is plunging Connecticut into so much debt. They say that unions have done their part in reducing the state’s labor costs by agreeing to raise the retirement age from 55 to 62, to require new workers to contribute to their pensions, to cut carry-over vacation days and, on occasion, to defer pay hikes.
“People blame the unions for [the state’s unfunded liability]. It’s not the unions. Historically, the state never funded its pension obligations,” said Labor Relations Director Linda Yelmini, who heads the state’s contract negotiations with 13 state employee union representatives.
“Prior to collective bargaining, the Connecticut General Assembly improved pension benefits without paying for them,” she added.
Lawmakers did take a step last year toward getting a handle on the pension and benefits obligation by approving the sale of $2 billion in pension obligation bonds towards teacher retirement costs. But even after that move, Connecticut remains a laggard among the states in funding its pension and benefit liabilities.
Power Play
Yelmini, who has been involved with union negotiations for more than 20 years, says the union’s negotiating power lies with the Last Best Offer binding arbitration process.
Since 1987, arbitrators have tended to favor proposals presented by the state employee unions, she said. “The pendulum went back to the union,” Yelmini said. “Last Best Offer arbitration led to increasing [state worker] pay dramatically.”
In regard to pay raises, union leaders maintain that the pay hikes have been close to the private sector average of about 3 percent over time.
In the current year, state workers received on average a 4.63 percent pay raise, according to OPM.
But O’Brien of the CSEA blames the state for its reliance on the arbitrators, noting, “The state never comes to the table with their marching orders. Even when times are good, they don’t come to the table [prepared to deal.]”
“This way the state can point to the arbitrators to blame,” Rinker said.
Daniel Livingston, an attorney who has served as the state employee unions’ chief negotiator since the mid-1990s, pointed out that the Last Best Offer binding arbitration really isn’t all that “binding.”
If the state is unhappy with the arbitrator’s selection, it can vote it down, he said. In contrast, state employees have no recourse once an arbitrator chooses sides. Likening it to the finality of a score once a basketball game is over, state employee workers can’t call for a do-over. But the state can, he said.
During the mid-1990s, the legislature rejected 11 of 12 binding arbitration agreements and restarted the process, Livingston said.
“It’s very unfair,” he said.
However, Livingston said that the Last Best Offer process does level the playing field in regard to negotiations because it provides a mechanism to resolve an impasse in talks. While union members working in the private sector can break an impasse by striking, state workers are prohibited from striking, he noted.